Global credit ratings agency Fitch Ratings has warned Australian banks face a more challenging environment in 2014.
Profit growth is likely to be “modest at best” said agency in its 2014 Outlook: Australian Banks
Strong loan competition is set to put pressure on bank margins, along with high impairment charges resulting from asset-quality deterioration. However this is likely to be offset, at least in part, by high credit growth and reduced funding costs in 2014.
“Australian bank profitability is likely to remain solid through 2014, providing a buffer to absorb Fitch’s expected asset-quality deterioration,” said Roche and Jaehne. “The banks generally have substantial buffers in addition to profit – provisions and capital – to absorb losses in the unlikely scenario that they exceed pre-provision operating profit,” said the report.
While household leverage remains high it is “modestly” declining, which could put banks in a vulnerable position should unemployment levels or interest rates rise significantly.
“Cost management should remain a key focus for the Australian banks. Wealth management and measured expansion into Asia provides earnings diversification for the larger banks.”
has recently made clear its desire to acquire further assets in the Asian market.
Fitch, however, warns a severe slowdown in China could provide a significant risk to Australian banks’ asset quality due to the country’s reliance on China for exports.
The potential for loosening underwriting standards due to competition could also put pressure on asset quality, said the report.
“This does not appear to be occurring; but if it were, it would most likely be manifested in asset quality numbers beyond 2014.”
The agency said any major losses were likely to emerge from commercial lending as most consumer lending is secured against properties.
“Commercial loans have continued to perform well despite continued weakness in some non-mining industries. Banks’ credit exposure remains well diversified by industry and single names.
“It is likely that some small to mid-sized mining contractors will come under some pressure as mining investment starts to subside, while it is possible defaults will start to emerge in non-mining sectors as businesses continue to grapple with subdued conditions,” the report says.